Variations and the three year rule

The Agricultural Holdings (Scotland) Act 1991, s 13(8) provides that a reference to the Scottish Land Court for review of the rent of an agricultural holding shall not be demanded in circumstances such that any increase or reduction of rent made in consequence would take effect from a date earlier than three years from the latest of (a) the commencement of the tenancy, (b) the date as from which there took effect a previous variation of rent (under the section or otherwise), and (c) the date as from which there took effect a previous direction that the rent should continue unchanged.

Two recent cases have considered these provisions (or their equivalent in the English legislation), and in particular circumstance (b).

Variation in context

In A C Stoddart v The Colstoun Trust, SLC/226/04 (the Court of Session having earlier held that it was competent for the tenant to require a rent review by notice served against a break expressed to be in favour of the landlord alone), the landlord sought to introduce, late in the day, an argument that a nominal reduction in rent agreed by the parties following the exercise of a contractual power of resumption amounted to “a previous variation of rent (under this section or otherwise)”. The Scottish Land Court disallowed this on procedural grounds, but indicated that, had it been required to do so, it would have found against the landlord.

The court took the view that “variation of rent” in s 13(8)(b) fell to be interpreted in the context of the section as a whole, which provides for what the court called “full scale rent review”, i.e. determination of the appropriate rent for the holding, as such. The minimal reduction in rent following the resumption did not, therefore, in the court’s view, constitute a rent variation within the three year period.

This decision has been appealed by the landlord and will be reviewed in January next year.

The Land Court considered the 1991 English Court of Appeal decision in Mann v Gardner (1991) 61 P & CR 1 (where it was held, on the corresponding English provision, that adjustment of rent on the voluntary surrender by the tenant of a cottage constituted a “previous… reduction of rent” precluding any further review for three years), but distinguished it on the basis that the Agricultural Holdings Act 1986 precluded rent review within three years of inter alia “a previous increase or reduction of rent”, whereas the 1991 Act used the more general term “variation”.

VAT’s enough

The Mann v Gardner approach was, recently, taken by the English High Court in Mason v Boscawen 2008 WL5245793, where it suggested that the decrease by the Chancellor, on 1 December 2008, of the VAT rate to 15% amounted to an interim “reduction of rent” for holdings where landlords have opted to waive the exemption from VAT. This followed a searching analysis of the VAT legislation (which, of course, applies across the UK) and associated case law, under which the VAT element is regarded as being part of the rent. The court applied the same meaning of “rent” to the review provision and opined that a variation in the rate of VAT amounted to a “reduction of rent… under that section or otherwise”.

This seems a baffling decision which the judge concerned reached very reluctantly, referring to it as “an unintended consequence” of agricultural legislation which had preceded the introduction of VAT. He called upon Parliament to change the law to remedy the situation and indicated that his decision was a question of such general importance that he would be minded to grant leave to appeal. I understand, however, that there has been no appeal.

The English case has caused confusion, even in Scotland, although only in the limited number of cases where the option to tax has been exercised. It is arguable that the expressions “a previous increase or reduction” of rent in the English legislation and “variation of rent” in the 1991 Act are sufficiently similar that, if the matter were to be put to the test, Mason might be followed in the Scottish courts, with awkward consequences for some Scottish landlords, particularly given that the situation will be repeated when the Chancellor reimposes the 17.5% VAT rate in 2010. The problem will, on the other hand, recede if the Land Court’s proposition in Stoddart, that the word “variation” referred to a full scale rent review and not to a de minimis interim variation, is upheld.

Time will tell and guidance will, no doubt, be handed down by the Court of Session in terms of the Stoddart appeal, although legislative change might be the simplest way of rectifying an obvious anomaly.